EUR/GBP Unwinds Sharply with ECB Outlook Reversed
The Euro had its largest 1-day loss against the Pound on Monday,
and continued to slide throught the week. The pair was looking
to reach parity until European Central Bank’s interest rate
speculations flipped. Since members noted the slowing of
inflation, the market is now expecting the central bank to be
more aggressive in cutting rates. In the meantime, the pound got
a lift as the Bank of England slowed the rate cutting campaign,
and the government is renewing its stimulus efforts. Since
making a record high around 0.9820, the pair slid nearly 1000
pips to a low of 0.8840.

EUR/USD Continues Retracement Pattern
EUR/USD failed to come out of its retracement pattern. The
combination of poor fundamentals and lower inflation sets up the
ECB for a very dovish stance. With inflation data suggesting of
a deflationary period, the euro fell to end 2008 and to start
2009. The consolidation this week reflected the market’s
anticipation of Friday’s US non-farm payroll employment report.
The dollar gained after the report as the numbers were in-line
with expectations.

USD/CHF Bounces off Important Support
The flight to the Swiss Franc as a safe haven currency took some
unwinding this weeks after hitting long-term resistance (Refer
to previous issue). Reflecting the bout of risk appetite to
start the year, the USD/CHF pair rallied, bringing it to the 38
.2% retracement of its recent downtrend.

Technial Setup:
The current EUR/USD retracement has completed the a,b,c and d
waves and is looking to extend to 78.6% retracement or the 1
.3000 level. The projected dynamic support may also coincide with
this level making it a classic “abcde retracement” in a channel.
This very signficant support may be a springboard for EUR/USD
should the pair continue its uptrend. For a possible entry
trigger, or confirmation of one, look for the slow stachastic to
dip below oversold levels and wait for it to re-emerge above 20,
as this has been followed by a rally in the last 2 cases.

Fundamental outlook:
It is quite possible that the ECB is going to beome more
aggressive in rate cuts, which puts major pressure on the Euro.
This is the drive behind the current retracement. On the
otherhand, prospects of increasing US dollar money supply to
fuel the much discussed economic stimulus plan also weighs on
the greenback. The fundamental outlook is thus euro weakness in
short-run, but even more dollar weakness in the medium-long run.

GBP/JPY: Birth of New Trend? Anticipate Completion of Retracement

Technical Setup:
The carry trade pair, GBP/JPY has completed a wedge consolidation
that started in November, breaking above the pattern. Coinciding
with this breakout was a 20-SMA crossover, and a possible break
of a minor resistance at 139.00. These all point to signs of a
new uptrend. However, we saw similar 20-SMA crossover in the end
of October which produced a false buy signal. Although the
current market dynamics are different, it is prudent to look for
further confirmation. If the market rebounds after a retest of
the 20-SMA, there is a higher probability that this is the
beginning of of a valid uptrend.

Fundamental Outlook:
Early optimism trailed off by Friday as poor fundamentals around
the world overtook expectations of recovery. The unemployment
picture around the world worsened, and there shouldn’t be any
reason for positive expectations. We have seen less than
impressive bouts of risk appetite like this week’s. Therefore,
the fundamental data still points to pressure on carry trade
pairs such as the GBP/JPY and lowers the probability of a
sustainable rally.
EUR/GBP: Will Pair Break Resistance?

Technical Setup:
The EUR/GBP pair’s sharp decline has slowed to end the week as it
tests significant resistance. This coincides with the 61.8%
retracement of the latest leg to the current uptrend.
Furthermore, the slow stochastic shows oversold conditions. The
wide range of the bearish candles should raise caution to those
anticipating continuation of the uptrend. It is quite possible
that instead of a retracement, this could be the beginning of a
reversal. Therefore a bounce from this support/retracement level
should be viewed conservatively as a retracement of a new
downtrend instead.